The Oil Reserves Of Royal Dutch Shell: How Royal Dutch Shell Has Accounted For Their Oil Reserves As A Practise Of Looking For Grey Areas In Financial Accounting.

2098 words - 8 pages

"Initially there is simply a business problem. Then people start messing with the numbers to cover it up." Christian Leuz, WhartonAimI will look into how Royal Dutch Shell (hereafter only Shell) has accounted for their oil reserves as a practise of looking for grey areas in Financial Accounting.I choose Shell because when the news broke out, the international financial press was quick to label it "Europe's Enron" and after reading about Parmalat and the US scandals it was interesting with a European one. As the media rage over corporate wrongdoing grows louder, it could be likely that Europe might see its own version of corporate governance reform, comparable to the legislations in the US?Christian Leuz, a professor of accounting at Wharton, has done research which incorporates information from some 8,000 companies in 31 countries to support his contention that insiders use discretion in financial reporting to boost reported earnings and conceal losses, thus smoothing earnings. Logically, he sees no reason why European countries would be any less likely to do so than American companies, the home of such scandals as Enron and Tyco, despite a common gut reaction that European companies are more conservative.The Oil IndustryThe Oil Industry and market is complex. It was defined by entrepeneurs in the beginning and then driven by an enormous demand. The first entrepeneur that managed to refine oil was Edwin L Drake in Pennsylvania 1859. And then the story was continued by John D Rockefeller. The first part of our century the industy was dominated by 7 large oil companies called 'the seven sisters'.In our modern time competition has hardened, the sisters are now only five; BP, Chevron Texaco, Exxon Mobil, TotalFinaElf and Royal Dutch Shell. Many companies have been bought or turned into bancruptcy. During the golden years companies and adminstrations grew. When the demand diminished, the organizations changed and administrations were cut. Shells accounting of the oil reserves is probably due to the reason that they haven't been as good as their competitors to find new oil- and gas reserves in a dipping market. I will try to show you this point in this essay.What happened at Shell?Friday, Feb 9th 2004, Shell announced that they had mistakingly overbooked their proved reserves of oil and gas with approximately 20% of their total reserves, 3.9 billion barrels. Only the oil part, about 2/3 of this, would be about $ 68 billions of future revenue based on todays oil prize.Oil reserve accounting is vital for investors. Investors buy a company's shares to get a stake in current and future earnings. For energy companies - or any firm that has its product sales capped by limited supply versus potential market demand - investors have to take into account how long resources to generate future earnings will last in calculating their expected return. Thus, the stock price of an energy company is intimately tied to the amount of oil or gas reserves it claims....

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